Lecture_Notes_8 - THEREALECONOMY PotentialGDPandthe...

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Potential GDP and the Natural Unemployment Rate CHAPTER 8 THE REAL ECONOMY
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8.1 MACROECONOMIC APPROACHES In this chapter and the ones that follow, we will study the theories of macroeconomics that explain macroeconomic performance and the policies that might improve it. There are several schools of thought on these theories and the policies that might improve it. We will review two of those policies
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8.1 MACROECONOMIC APPROACHES The Two Main Schools of Thought The two main approaches to macroeconomics are based on two schools of thought : Classical macroeconomics Keynesian macroeconomics
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8.1 MACROECONOMIC APPROACHES Classical macroeconomics: The classical view of macroeconomics is that markets work well and deliver the best available macroeconomic performance. The economy will fluctuate, and growth will slow down from time to time, but no government remedy can improve the performance of the market.
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8.1 MACROECONOMIC APPROACHES Classical macroeconomic thought run into problems during the Great Depression - a decade (the 1930s) of high unemployment and stagnant production throughout the world economy. Keynesian macroeconomics: This school of thought also believes in the market economy but it stresses that there are times when active government intervention is needed to achieve full employment and sustained economic growth.
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8.1 MACROECONOMIC APPROACHES His prediction became reality during the 1960s and 1970s, when inflation exploded, growth slowed, and unemployment increased. It was time for another challenge to the mainstream approach and a new generation of economists came up with new macroeconomics, which used a combination of classical and Keynesian economic ideas.
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8.1 POTENTIAL GDP Potential GDP: It is the level of real GDP that the economy would produce if it were at full employment. We produce the goods and services that make up
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This note was uploaded on 06/21/2011 for the course ECON 201 taught by Professor Staff during the Spring '08 term at Northern Virginia Community College.

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Lecture_Notes_8 - THEREALECONOMY PotentialGDPandthe...

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